What Did 2020 Do to Retail?

One of the legacies of the 2020 pandemic and the resulting lockdowns is the long list of retailers who’ve filed for bankruptcy. In the United States, the list of causalities includes Lord & Taylor, Neiman Marcus, Pier One, Brooks Brothers, Sur La Table, Guitar Center, and Stein Mart. During this same period, as consumers have increased their reliance on online shopping, Amazon’s share price has risen from $1,900 to $3,160. Will the end of the pandemic bring a surge of business to retailers? Will online grocery shopping become the norm? Can anything slow Amazon’s path to world domination?

To make sense of the long-term impact of the changes we’ve seen in 2020, HBR spoke with Marc-Andre Kamel, a Paris-based partner who heads the global retail practice at Bain & Co. Here are edited excerpts from that interview:

One view that’s been repeated frequently during 2020 is that the pandemic tended to accelerate existing trends, rather than start entirely new ones. Is that true in retailing?

Absolutely. The world of retail was already going through extreme turbulence, driven by a number of factors. The first is consumer behaviors and demographic changes — more single parent households, more people living alone, more urban living. This is a 20-year trend.

On top of that, you have changing expectations — for more quality, more convenience, more speed, more choice, more value, all at the same time. That creates an impossible economic equation for retailers.

At the same time, the market has been rocked by the emergence of disruptive business models. You have, on one hand, the “monster ecosystems,” like Amazon and Alibaba, but there are also smaller disruptors in every category. In apparel, for instance, you now have more ability to rent clothing, and there’s been growth in second-hand apparel. That’s just one example.

Beyond the ecosystems like Amazon and Alibaba, what other types of retailers are well-positioned?

We see four other archetypes that have sustainable positions. One is what we call “regional gems”: They are companies that are doing well in local markets. They are protected by having very strong ties to the consumer base and a good value proposition. For instance, there are strong retailers in countries like Portugal, Switzerland, and Russia, where Amazon does not have a strong presence. Eventually these companies may be challenged by a new business model emerging — we can’t be sure they will survive — but right now their strategy is working.

The second is what we call “hitchhikers,” who ride on the back of platforms. They are typically highly creative, branded retailers with great consumer appeal (think Burberry or Lacoste, for instance) or successful food retailers (think Monoprix or Morrison’s) that are not big enough to sustain the fight on technology on their own, so they choose to sell through the ecosystems and piggyback on that growth.

The third model that’s doing well is thevalue players” — companies for whom reducing cost and keeping prices low are in their DNA. Aldi, Trader Joe’s, Primark, and TJ Maxx are examples of that.

The final archetype is the “scale fighters.” They are companies that have enough size to try to fight the ecosystems. Walmart is one example, although it’s trying to become an ecosystem itself. So those archetypes are how we see the retail world, and some of them have done relatively well through the pandemic.

What about the companies that aren’t well positioned?

We call those the “legacy laggards.” Their challenge is to run the company and change the company at the same time. That’s very difficult, and Covid has only increased that challenge. We believe that in the United States and Western Europe, more than one in three retailers falls into this category. These companies struggle to maintain profitability. They face market pressure and shareholder pressure. They strip out cost to try to preserve margins, reducing investment, which can exacerbate their problems. Generally, these companies go through consolidation or they fail. These include many companies have filed for bankruptcy in 2020, including household names like Lord & Taylor, JC Penney, and Neiman Marcus in the U.S., and Debenhams, Arcadia, and many others in Europe.

The legacy laggards are the most visible retailers that are struggling, but there’s another category that we call “unsustainable innovators.” These are companies that launch something exciting in the digital space but have no real path to profitability. As they grow, either they fail or they get acquired. As they grow, either they fail or they get acquired by scale fighters who learn from them. Jet.com, which was acquired by Walmart, is an example of that.

Some people hope for a strong retail rebound as societies become vaccinated, based on the idea that there’s pent-up demand to go shopping. Is that a reasonable hypothesis?

There are two conflicting signals. One is demographic. Gen Z has a different approach to consumerism than older generations. They are also less focused on conspicuous consumption, and more on sustainability and meaning. Covid accelerated this trend and made it more cross-generational. These forces would lead one to believe that in the long run, we’ll see less of a rush for consumption.

The conflicting signal comes from China, which came out of the lockdown faster than the Western world. China did experience a retail surge after lockdown. It lasted around three or four months and was more online than offline. Traffic in malls is still a little depressed, but conversion is higher — people who go to stores are more likely to buy. By the end of 2020, retail growth will be positive in China — the additional buying it’s seen since lockdown has more than made up for business lost during lockdown. Luxury brands are selling especially well post-lockdown — some are up 40 to 50% — but Chinese consumers were already  the leading buyers of luxury goods before the pandemic, so it’s difficult to draw conclusions from the repatriation of some of their global purchases.

The lockdowns and panic-buying led some people to rethink grocery shopping habits. What long-term effect will that have on grocery retailing?

Even before the pandemic, when it came to eating, people were making tradeoffs between time and money. You had a lot of people eating ready-to-eat, and fewer people cooking. That’s more expensive on a unit basis, but they’re saving time. And out-of-home food consumption was growing quickly. In some Western countries, people were already spending more than 50% of their food budget on restaurants and takeout, rather than on groceries.

How much will the pandemic change those trends? Some argue that this experience allowed people to rediscover cooking and enjoying meals at home with the family. There may be a segment of people who discovered cooking as a hobby during the pandemic, but our research suggests 90% of people want to be able to go to restaurants again. When lockdown ended here in Europe, people rushed to restaurants. So I’m not sure the split between grocery spending and restaurant spending is going to be dramatically affected long-term.

I do expect more people to continue buying groceries online, because it’s convenient.

As a consultant, how do you help the legacy laggards who are your clients?

It is possible for a company to still shake itself from this trajectory. It all starts with differentiation and a value proposition that is tailored to the target customer segment you want to delight.

Take one example: department stores. I don’t think department stores will completely disappear. There is value in creating an edited assortment for customer segments looking for the editing and curation that department stores bring. Many of these big retailers that are failing have lost sight of who the customers are they want to delight. They try to delight everyone, but they fragment their resources and wind up delighting no one.

So one of the things we do with laggard retailers is help clarify their ambition and identify the customer target they are going after. Once they understand that, they can think more broadly about reinventing their value proposition. In some cases, this might involve selling not just products, but services. In some cases, it might involve partnering with another company to become stronger. I do think we’re in the beginning of a big consolidation cycle in retail. Some companies will fail and disappear, but retail is sticky. Instead of failing, we’ll see companies getting together.

Can anything stop the growth of the ecosystems?

There’s one number I use to put this in perspective: Between 2019 and 2024, Amazon will invest $100 billion more in IT than any of the other top 10 retailers in the world. When you’re competing against a company that can spend like that, and which has a history of successful innovation, it’s not a fair fight. This is part of what will drive consolidation.

Amazon has two audiences — the consumers who buy from it, and the smaller businesses that sell through it. People recognize Amazon’s success with consumers; during 2020 it’s also doubled the number of businesses that transact on its platform.

At the same time, not everything is rosy. In the United States, Amazon had periods where it could not deliver items on time. Its customer experience went down during some periods in the pandemic. So there are limitations on fast growth, even for a great company.

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